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ifo Institut – Leibniz-Institut für Wirtschaftsforschung an der Universität München >
CESifo Working Papers, CESifo Group Munich >
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http://hdl.handle.net/10419/26041
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| Title: | | Moral hazard and the composition of transfers: theory with an application to foreign aid  |
| Authors: | | Amegashie, J. Atsu Ouattara, Bazoumana Strobl, Eric |
| Issue Date: | | 2007 |
| Series/Report no.: | | CESifo working paper 1996 |
| Abstract: | | The paper presents a theoretical and empirical analysis of a donors choice of the composition of unrestricted and in-kind/restricted transfers to a recipient and how this composition is adjusted in response to changes in the moral hazard behavior of the recipient. In-kind or restricted transfers may be used, among others, to control a recipients moral hazard behavior but may be associated with deadweight losses. Within the context of foreign aid, we use a canonical political agency model to construct a simple signaling game between a possibly corrupt politician in a recipient country and a donor to illustrate the donors optimal choice of tied (restricted) and untied foreign aid. We clarify the condition under which a reduction in the recipients moral hazard behavior (i.e., improvement in the level of governance) leads to a fall in the proportion of tied aid. We test the predictions of our theoretical analysis using data on the composition of foreign aid by multilateral and bilateral donors. |
| JEL: | | D73 F35 H87 I38 |
| Document Type: | | Working Paper |
| Appears in Collections: | | CESifo Working Papers, CESifo Group Munich
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